Pension surplus transfers qualified for the replacement-plan exception

Plain-English summary

A public company terminated two defined benefit pension plans and proposed transferring all surplus assets to two corresponding defined contribution profit-sharing plans. At least 95 percent of active participants who remained employees would participate in the appropriate replacement plan. The transferred assets would either be allocated in the transfer year or held in suspense accounts and allocated at least ratably over seven plan years, without satisfying employer matching obligations. The IRS ruled that the receiving plans were qualified replacement plans under section 4980(d)(2). The transfers would not be employer income, deductible contributions, employer reversions, or amounts subject to the section 4980 excise tax. For section 415 purposes, transferred amounts would become annual additions only when allocated to participant accounts.

Ruling snapshot

• Question: What tax treatment applies when surplus assets from two terminated pension plans are transferred to qualified replacement defined contribution plans?
• Outcome: Approved on all eight requested rulings
• Key authorities: IRC §§ 404, 415, and 4980(c) and (d); Rev. Rul. 2003-85

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202348005 Third Party Communication: None
Release Date: 12/1/2023 Date of Communication: Not Applicable
Index Number: 4980.00-00, 4980.02-00
Person To Contact:
------------------------------------------ -----------------, ID No. -----------------
----------------------- Telephone Number:
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--------------------------------- Refer Reply To:
CC:EEE:EB:QP1
In Re: ---------------------- PLR-105144-23
Date:
August 29, 2023

Taxpayer = ----------------------
Plan A = --------------------------------------------------------------------------
Plan B = -----------------------------------------------------------------
Plan C = -----------------------------------------------------------------------------------------------
---------------------------
Plan D = ---------------------------------------------------------------------------

Dear -------------:

This is in response to a request for a letter ruling submitted on behalf of Taxpayer by its
authorized representatives on March 1, 2023, as supplemented by correspondence
dated June 1, 2023, and August 15, 2023, regarding the proper treatment of the transfer
of surplus assets to Plan C following the termination of Plan A, and to Plan D following
the termination of Plan B under section 4980 of the Internal Revenue Code (Code).

Facts

Taxpayer has represented the following facts:

Taxpayer, a publicly-traded corporation, sponsors two tax-qualified defined benefit plans
(Plan A and Plan B) and two tax-qualified defined contribution plans (Plan C and Plan
D) which are profit-sharing plans that includes a cash or deferred arrangement intended
to qualify under section 401(k). Plan A and Plan C provide benefits to salaried and non-
union employees and Plan B and Plan D cover employees whose employment is
governed by collective bargaining agreements. All four of these plans are individually
designed and have periodically received favorable determination letters throughout their
existence and operation.

Taxpayer terminated Plan A and Plan B effective December 31, 2021 and has
submitted a request for the determination of qualified status of Plan A and Plan B upon
PLR-105144-23 2

termination to the Service, using Form 5310 (Application for Determination upon
Termination). After issuance of a favorable determination letter by the Service in
connection with the termination of Plan A and Plan B, Taxpayer will undertake the
complete liquidation of all assets in both plans and payment of all benefit commitments
to all participants in both plans. Assets remaining in each plan following distribution of
all benefits and payment of all expenses associated with the termination of the plans are
excess assets that will be subject to the possible reversion to Taxpayer.

After payment of all benefits from Plan A and Plan B and satisfaction of all expenses
associated with their termination, Taxpayer proposes to transfer all excess assets in
Plan A to Plan C and all excess assets in Plan B to Plan D. Taxpayer has confirmed
that by transferring excess assets in this manner at least 95 percent of the active
participants in the Plan A and at least 95 percent of the active participants in Plan B who
remain as employees of taxpayer after the termination of the plans will be active
participants in the respective Plan C and Plan D.

Taxpayer will either allocate the transferred funds from Plan A and Plan B to the
accounts of the respective Plan C and Plan D participants in the plan year in which the
transfer occurs, treating the transferred funds in the same manner as a non-elective
contribution by Taxpayer, or, in the alternative, credit the transferred funds to a
suspense account established in each of Plan C and Plan D. 1 In the event the
transferred funds are transferred to suspense accounts in Plan C and Plan D,
respectively, Taxpayer will allocate the transferred funds from the applicable suspense
account to participants’ accounts in the Plan C or Plan D no less rapidly than ratably
over a 7-plan-year period, beginning with the year in which the transfer occurs, treating
the transferred funds in the same manner as a non-elective contribution by Taxpayer. In
no event will Taxpayer use or apply any transferred funds or any funds in either
suspense account to satisfy any matching contribution obligation Taxpayer may have
with respect to Plan C or Plan D.

If the limits imposed by section 415 prevent the allocation of any amount in either
suspense account to a participant in Plan C or Plan D before the close of the 7-year
period, that amount will be allocated to the accounts of other participants. If any portion
of the suspense account amount may not be allocated to other participants by reason of
any limitation, it will be allocated to participant accounts as otherwise provided under
section 415. Taxpayer does not anticipate that any amounts to be allocated from the
transferred funds will exceed the limits under section 415, whether allocated in a single
year or placed in the suspense account ratably over multiple plan years.

1
Taxpayer will cause Plan C and Plan D to be amended, to the extent necessary, prior to the receipt of
the transferred funds from Plan A and Plan B, respectively, so that the transferred funds may be held in
the conforming suspense accounts for subsequent allocation, if all transferred funds are not allocated in
the year of transfer.
PLR-105144-23 3

Taxpayer requests the following rulings:

1. Plan C and Plan D are qualified plans within the meaning of section 4980(c)(1).
2. Based on Taxpayer’s compliance with the requirements in section 4980(d)(2)(A)
   and (B), Plan C and Plan D are qualified replacement plans within the meaning of
   section 4980(d)(2).
3. The excess assets transferred from the terminated Plan A to Plan C will not be
   includible in the gross income of Taxpayer.
4. The excess assets transferred from the terminated Plan B to Plan D will not be
   includible in the gross income of Taxpayer.
5. With respect to the transfer of the excess assets from the terminated Plan A and
   Plan B to the respective Plan C and Plan D, no deduction is allowable to
   Taxpayer under section 404 and the amount transferred will not offset the
   maximum deductible amount otherwise available to Taxpayer under that Code
   section.
6. The excess assets transferred from the terminated Plan A and Plan B to the
   respective Plan C and Plan D will not constitute or be treated as a reversion to
   Taxpayer.
7. No amount of the excess assets transferred from the terminated Plan A and Plan
   B to the respective Plan C and Plan D will be subject to any excise tax under
   section 4980.
8. The excess assets transferred from the terminated Plan A and Plan B to the
   respective Plan C and Plan D will not be treated as annual additions to either of
   the respective Plan C and Plan D under section 415 until allocated to participant
   accounts.

Applicable Law

Section 61 provides that, except as otherwise provided in Subtitle A, gross income
means all income from whatever source derived.

Section 404 provides rules governing the deductibility of employer contributions to an
employees’ trust or annuity plan or with respect to a deferred compensation plan. Under
section 404(a), if contributions are paid by an employer to or under a stock bonus,
pension, profit-sharing, or annuity plan, those contributions are not deductible under any
other provision of Chapter 1 of Subtitle A of the Code. If those amounts would otherwise
be deductible, however, they are deductible under section 404 subject to specified
limits.

Section 415(c) provides that contributions and other additions with respect to a
participant exceed the limitation of this subsection if, when expressed as an annual
addition to the participant's account, such annual addition is greater than the lesser of
$40,000 (as indexed in accordance with section 415(d)(1)(C)), or 100 percent of the
participant's compensation.
PLR-105144-23 4

Section 415(c)(2) provides that, for purposes of section 415(c)(1), the term “annual
addition” means the sum for any year of employer contributions, employee
contributions, and forfeitures.

Section 4980(a) imposes a 20 percent excise tax on the amount of any employer
reversion from a qualified plan. Under section 4980(d)(1), the excise tax under
section 4980 is increased to 50 percent with respect to an employer reversion from a
qualified plan unless the employer either establishes or maintains a “qualified
replacement plan,” or the plan provides for certain benefit increases which take effect
on the termination date.

Section 4980(c)(1) generally defines a “qualified plan” as any plan meeting the
requirements of section 401(a) or section 403(a), other than a plan maintained by an
employer if such employer has, at all times, been exempt from tax under Subtitle A, or a
governmental plan (within the meaning of section 414(d)).

Section 4980(c)(2) generally defines the term “employer reversion” as the amount of
cash and fair market value of other property received (directly or indirectly) by the
employer from the qualified plan.

Section 4980(d)(2) defines a “qualified replacement plan” as a qualified plan established
or maintained by the employer in connection with a qualified plan termination, which
satisfies the participation, asset transfer, and allocation requirements of
section 4980(d)(2)(A), (B), and (C).

Section 4980(d)(2)(A) requires that at least 95 percent of the active participants in the
terminated plan who remain as employees of the employer after the termination be
active participants in the replacement plan.

Section 4980(d)(2)(B) requires that a direct transfer from the terminated plan to the
replacement plan be made before any employer reversion, and that the transfer be an
amount equal to the excess (if any) of (i) 25 percent of the maximum amount which the
employer could receive as an employer reversion without regard to section 4980(d),
over (ii) the amount equal to the present value of the aggregate increases in the
accrued benefits under the terminated plan of any participants or beneficiaries pursuant
to a plan amendment adopted during the 60-day period ending on the date of
termination of the qualified plan, and which takes effect immediately on the termination
date.

Section 4980(d)(2)(B)(iii) provides that in the case of the transfer of any amount under
section 4980(d)(2)(B)(i) from a terminated plan, such amount is not includible in the
gross income of the employer, no deduction is allowable with respect to the transfer,
and the transfer is not treated as an employer reversion for purposes of section 4980.
PLR-105144-23 5

Section 4980(d)(2)(C)(i) provides that if the replacement plan is a defined contribution
plan, the amount transferred to the replacement plan must be (I) allocated under the
plan to the accounts of participants in the plan year in which the transfer occurs, or (II)
credited to a suspense account and allocated from such account to accounts of
participants no less rapidly than ratably over the 7-plan-year period beginning with the
year of the transfer.

Section 4980(d)(2)(C)(ii) provides that if, by reason of any limitation under section 415,
any amount credited to a suspense account under section 4980(d)(2)(C)(i)(II) may not
be allocated to a participant before the close of the 7-plan-year period, that amount shall
be allocated to the accounts of other participants, and if any portion of that amount may
not be allocated to other participants by reason of such limitation, it shall be allocated to
the participant as provided in section 415.

Section 4980(d)(2)(C)(iii) provides that any income on any amount credited to a
suspense account under section 4980(d)(2)(C)(i)(II) shall be allocated to accounts of
participants no less rapidly than ratably over the remainder of the period determined
under section 4980(d)(2)(C)(i)(II) (after application of section 4980(d)(2)(C)(ii)).

Section 4980(d)(2)(C)(iv) provides that if any amount credited to a suspense account
under section 4980(d)(2)(C)(i)(II) is not allocated as of the termination date of the
replacement plan, (I) such amount shall be allocated to the accounts of the participants
as of such date, except that any amount which may not be allocated by reason of any
limitation under section 415 shall be allocated to the accounts of other participants, and
(II) if any portion of such amount may not be allocated to other participants under the
preceding subclause by reason of such limitation, that portion shall be treated as an
employer reversion to which section 4980 applies.

Section 4980(d)(4)(A) provides that a benefit may not be increased under
section 4980(d)(2)(B)(ii) or section 4980(d)(3)(A), and an amount may not be allocated
to a participant under section 4980(d)(2)(C), if such increase or allocation would result
in a failure to meet any requirement under section 401(a)(4) or section 415.

Section 4980(d)(4)(B) provides that any increase in benefits under section
4980(d)(2)(B)(ii) or section 4980(d)(3)(A), or any allocation of any amount (or income
allocable thereto) to any account under section 4980(d)(2)(C), shall be treated as an
annual benefit or annual addition for purposes of section 415.

Revenue Ruling 2003-85, 2003-32 I.R.B. 291, provides that the direct transfer from a
terminating plan that did not provide for increases in the accrued benefit of participants
to a plan intending to be a qualified replacement plan satisfied the requirements of
section 4980(d)(2)(B) when the amount transferred was at least 25 percent of the
maximum amount that the employer could receive as an employer reversion.
PLR-105144-23 6

Analysis

With respect to the first request, Taxpayer represents that Plan C and Plan D have each
received determination letters, which indicates that they satisfy the requirements of
section 401(a) and are thus qualified plans. Therefore, Plan C and Plan D are “qualified
plans” within the meaning of section 4980(c)(1).

With respect to the second request, Taxpayer represents that at least 95 percent of the
active participants in Plan A who remain as employees of Taxpayer after Plan A was
terminated and Plan A benefits are distributed are active participants in Plan C. In
addition, Taxpayer represents that at least 95 percent of the active participants in Plan
B who remain as employees of Taxpayer after Plan B was terminated and Plan B
benefits are distributed are active participants in Plan D. In addition, Taxpayer
represents that all remaining excess assets in Plan A will be transferred to Plan C, and
all remaining excess assets in Plan B will be transferred to Plan D. All of those assets
could revert to Taxpayer if not transferred to Plan C or Plan D. Taxpayer further
represents that Taxpayer will either allocate the transferred funds from Plan A and Plan
B to the accounts of the respective Plan C and Plan D participants or credit the
transferred funds to a suspense account established in each of Plan C and Plan D.
Based on these representations, Taxpayer will satisfy the participation, asset transfer,
and allocation requirements of sections 4980(d)(2)(A), (B), and (C). Based on these
representations, Plan C and Plan D are qualified replacement plans within the meaning
of section 4980(d)(2).

With respect to the third and fourth requests, Taxpayer represents that Plan A and Plan
B have been terminated and, after payment of Plan A and Plan B benefits and
expenses, all remaining assets from Plan A will be transferred to Plan C and all
remaining assets from Plan B will be transferred to Plan D. Section 4980(d)(2)(B)(iii)
provides that in the case of the transfer of any amount under section 4980(d)(2)(B)(i)
from a terminated plan, that amount is not includible in the gross income of the
employer. Therefore, excess assets transferred from the terminated Plan A and Plan B
to the respective Plan C and Plan D will not be includible in the gross income of
Taxpayer.

With respect to the fifth request, Taxpayer represents that pursuant to section
4980(d)(2)(B)(i) the assets from Plan A are being transferred directly to Plan C and the
assets from Plan B are being transferred directly to Plan D. Therefore, in accordance
with section 4980(d)(2)(B)(iii), no deduction is allowable to Taxpayer under section 404
and the amount transferred will not offset the maximum deductible amount with respect
to Plan C and Plan D otherwise available to Taxpayer under section 404.

With respect to the sixth request, Taxpayer represents that Plan C and Plan D will
receive all of the excess assets from Plan A and Plan B, respectively. Therefore,
Taxpayer will not receive any of the excess assets. Section 4980(d)(2)(B)(iii) provides,
in part, that in the case of the transfer of any amount under section 4980(d)(2)(B)(i) from
PLR-105144-23 7

a terminated plan, the transfer is not treated as an employer reversion for purposes of
section 4980. Therefore, the transfer of excess assets from Plan A to Plan C or from
Plan B to Plan D will not constitute or be treated as a reversion to Taxpayer under
section 4980.

With respect to the seventh request, because the transfer of excess assets to Plan B
and Plan D is not a reversion to Taxpayer, the amounts transferred to Plan B and Plan
D will not be subject to the excise tax under section 4980.

With respect to the eighth request, section 4980(d)(4)(B) provides that any allocation of
any amount (or income allocable thereto) to any account under section 4980(d)(2)(C), is
treated as an annual benefit or annual addition for purposes of section 415. Therefore,
excess assets transferred from Plan A to Plan C and Plan B to Plan D will not be treated
as annual additions to Plan C and Plan D accounts under section 415 until amounts are
allocated to Plan C and Plan D participant accounts from the suspense account.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer’s authorized representatives (including the representation that
the transfers will take place only upon the issuance of a favorable determination letter
from the Service on the termination of Plan A and Plan B) and accompanied by a
penalties of perjury statement executed by an appropriate party, as specified in Rev.
Proc. 2023-1, 2023-1 I.R.B. 1, § 7.01(16)(b). This office has not verified any of the
material submitted in support of the request for ruling, and such material is subject to
verification on examination. The Associate office will revoke or modify a letter ruling and
apply the revocation retroactively if there has been a misstatement or omission of
controlling facts; the facts at the time of the transaction are materially different from the
controlling facts on which the ruling was based; or, in the case of a transaction involving
a continuing action or series of actions, the controlling facts change during the course of
the transaction. See Rev. Proc. 2023 1, § 11.05.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling letter is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

PLR-105144-23 8

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to each of your authorized representatives.

Sincerely,

Jason E. Levine
Branch Chief
Qualified Plans Branch 1
Office of Associate Chief Counsel
(Employee Benefits, Exempt Organizations, and
Employment Taxes)

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